December 21, 2012
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Debt Ceiling Rises Again as Threat for the U.S.
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By MARY WILLIAMS WALSH
The three major ratings agencies shrugged off this week’s breakdown in talks aimed at ending the fiscal impasse in Washington by Jan. 1, saying their outlook for America’s sovereign debt was already negative and would not immediately change.
But officials of the agencies said they were looking toward another looming fiscal deadline — a date sometime in February or early March when the United States government risks running out of cash if Congress cannot find a way to raise its statutory debt ceiling. That date appears to pose more of a threat to the nation’s credit rating than Jan. 1, when a package of onerous tax increases and spending cuts will begin if America goes over what is commonly called the fiscal cliff.
Stock investors appeared on Friday to be more concerned about the economic consequences of raising tax rates than about a downgrade of the nation’s credit.
Stock prices fell around the world after Republican leaders announced Thursday night that they could not summon up enough votes for their own proposal to cut spending and raise taxes for the nation’s most affluent households.
The Standard & Poor’s 500-stock index fell 0.94 percent Friday, or 13.54 points, to 1,430.15. The Nasdaq composite index dropped 0.96 percent, or 29.38 points, to 3,021.01, and the Dow Jones industrial average fell 0.91 percent, or 120.88 points, to 13,190.84.
Stocks had largely risen over the last two weeks as President Obama and House Speaker John A. Boehner inched forward with small concessions.
Next week, the Treasury secretary, Timothy F. Geithner, is expected to alert Congress that the government has officially run out of borrowing capacity, currently limited to about $16.4 trillion under law. But Mr. Geithner has a package of extraordinary measures he can take to buy some time, so that lawmakers will not have to raise the nation’s debt limit even as they struggle to agree on how to shrink the budget deficit over the long term. The measures include suspending the issuance of special, nontrading Treasury bills that are used to finance federal employees’ retirement plans.
Fitch Ratings said in a report Wednesday that it was watching both processes and that the time frame was not open-ended.
“If the negotiations on the fiscal cliff and raising the debt ceiling extend into 2013, and appear likely to be prolonged with adverse implications for the economy and fiscal stability, the U.S. sovereign rating could be subject to review, potentially leading to a negative rating,” the agency wrote in its latest six-month report on sovereign debt.
It was a similar chain of events in 2011 that led Standard & Poor’s to downgrade the Treasury’s debt by one notch, an unprecedented move that set off wild swings in the stock market and led to downgrades at other highly rated institutions, like insurance companies, that had significant exposure to Treasury securities. Fitch and Moody’s have both maintained their AAA rating for Treasury debt, which has long been considered risk-free.
A credit downgrade normally makes it more expensive for an institution to borrow, but that did not happen after Standard & Poor’s action.
Global investors have kept on flocking to Treasuries, and the federal government’s borrowing rate has fallen to 1.77 percent, from above 2.5 percent.
The last time Mr. Geithner told Congress the government had exhausted its borrowing capacity and was resorting to the extraordinary measures was mid-May 2011. The measures gave Congress about two-and-a-half months to authorize a borrowing increase. But lawmakers nearly missed the deadline, and some said they thought a default was preferable to more borrowing.
“We came within 10 hours or so of a major cash-flow problem, which is inconsistent, our analysts felt, with a Triple-A credit,” John Piecuch, a spokesman for Standard & Poor’s, said Friday.
Even after the downgrade, Standard & Poor’s said its outlook was still negative, meaning that it saw a 1-in-3 chance of another downgrade within two years. It reaffirmed the negative outlook last June, resetting the two-year clock.
This time, fiscal analysts think Congress may have even less time to act on the debt ceiling. The Treasury has not said how long it will take to burn through the additional money, but the Bipartisan Policy Center, a research group, has projected that it will run out sometime in February. The Congressional Budget Office has said the special funding could last until mid-February or early March.
The ratings agencies have made clear that they will be watching to see whether Congress can raise the debt limit more smoothly this time.
“Last-minute agreements to raise the debt ceiling undermine confidence in the sovereign’s willingness to pay, and thus its AAA status,” Fitch said in its report.
“While Fitch believes the threat of default to be incredible, it would review the U.S. sovereign rating in the unlikely event of a repeat of the August 2011 debt-ceiling crisis.”
When a ratings agency puts a credit under review, it means it has begun an active, deliberate evaluation that could lead to a rating change in a matter of weeks or months. S.& P. had put Treasury debt under review mid-2011, several weeks before its downgrade that August.
Moody’s said in a report this year that it would probably put the federal government’s credit rating “under review” sometime after Mr. Geithner announces the exhaustion of the Treasury’s borrowing capacity, and “several weeks before the exhaustion of the Treasury’s resources.”
Moody’s had put the federal debt under review in July 2011 as well, but completed that review without changing the rating. It has reiterated since then that its outlook remains negative, and that it is watching this time for “a relatively orderly process for the increase in the statutory debt limit.”
Mr. Piecuch of S.& P. said the agency saw this week’s failure to agree on a plan to shrink the deficit in a different light from the failure last year to raise the debt ceiling until it was almost too late.
“In late July and August 2011, what seemed in the realm of possibility was that you could run up against that ceiling, and there would be a missed payment” on the public debt, he said. “In our system it’s very clear — a missed payment does constitute a default. When we’re thinking about the fiscal cliff, and whether or not there’s a deal by the end of this year, that’s not the same thing.”
The dominant fear among investors on Friday was that politicians are running out of time to come up with an agreement and have no clear path to a solution.
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“There’s such disarray about coming to a compromise even within the Republican Party,” said Douglas Cote, the chief investment strategist for ING Investment Management. “The market just says, ‘They are not coming up with any feasible plan.’ ”
In the bond market, interest rates fell. The price of the Treasury’s 10-year note rose 8/32, to 98 22/32, while its yield dropped to 1.77 percent, from 1.80 percent late Thursday.
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